Hedge Funds Are Down For the Year

You think you’ve got it rough. Consider the poor hedge fund manager, who has an awful lot riding on the percentage gains he or she is able to post for clients. The reason is that hedge fund skippers pocket about 20% of the fund’s gains in addition to their annual fee. Of course, it’s a bit more complicated than that because to pocket a juicy cut of profits hedge funds must be above the high water mark in performance (i.e. the fund can’t be clawing its way back to its old high,) and there could still be many funds that are under that mark due to the devastating losses of recent years. But for the rest, 2010 could be a year of big payoffs.

Only problem is, it isn’t.

A new Merrill Lynch report from technical analyst Mary Ann Bartels notes that year to date the average hedge fund is in the minus column, having lost 50 basis points, or one-half percentage point. That may not sound like terrible performance in these troubled times, but it is if you are counting on your 20% cut. Certainly not all hedge funds are in the red as some sub specialties such as convertible arbitrage funds are posting decent gains so far in 2010. But overall it’s been rough.

What’s more, there’s movement aplenty among the big players. The so called Long-Short hedge funds (they make bets on both sides) are net long at the moment, though they are trimming their exposure to emerging markets. I suppose that’s because so many investment strategists are telling clients that emerging markets will lead the world in growth in the years ahead, so get your slice of the pie. Whenever such advice reaches a fevered pitch, the hedgies move in the other direction. Also, Large Speculative hedge funds—a title that pretty much says it all—are evidently betting big on declining prices for natural gas, likely a bet on all that gas fracking going on, which should greatly increase supply. Meanwhile, macro hedge funds—those that bet on big economic trends—are building a big short position in commodities as well as the 10-year Treasury note. The fact that one of these is a traditional deflation bet and the other is a traditional inflation bet might lead you to think these managers are tripping over themselves, but the more likely explanation is that they are both bets on continued hard times for the world economy and concerns about America’s economic policy.